STRUCTURE OF SECURITIES MARKET

A securities market is a market where different players present in the economy engage in the buying
and selling of securities like equity instruments (stocks) and debt instruments (debentures, bonds).
It is the market in which companies who require funds and persons with surplus funds can meet for
transacting these funds with each other.
Right now, you are a participant of the securities market created in the Finlatics program. Here,
you have a virtual corpus of Rs. 2,00,000 and are engaged in the buying and selling of equity
instruments (stocks).

Broadly, the securities market can be divided into two forms:

1. Primary Market
2. Secondary Market

Let’s start by understanding the primary market.

PRIMARY MARKET

The primary market is a part of the security market which involves a new issue of securities (debt
or equity) and is sold directly to the investors by the issuing company. Hence, it is also called as a
new issue market.

Private companies and government entities can issue debt-based securities like bonds or equity-
based securities like stocks for funding their business activities. The new issue of securities by such
entities is involved in the primary market.The issue of new securities which take place in primary
markets can be of different types. Some of them are explained below:

A firm can decide to issue securities to the public, called public issue, via the following methods:

Initial Public Offering (IPO)

Under the initial public offering, a firm issues its equity shares for the first time in the stock market.
This process is accompanied by the company becoming listed on a stock exchange for the sale of
its shares. The shares of a private corporation, which were until now distributed amongst its owners
and not listed on any stock exchange, are offered for sale to the general public during an initial
public offer and once the company undergoes an IPO it becomes a publicly traded company.
Usually, companies that are growing and are in need of a substantial amount of funds to expand
their activities resort to the IPO method for raising resources.

An example of how the IPO process works will give you a better understanding of the concept:

In continuation with our hypothetical company ABC Ltd, we will now consider that the company
was established in 2005 as a privately owned company (not listed on any stock exchange). After
managing its operations successfully for more than 13 years, the company now plans to go public
in the year 2019 because it requires a substantial amount of funds for expanding its operations into
other businesses. It does so by issuing shares priced at Rs 10 to raise Rs 50 lacs - the company will
issue 5,00,000 shares to raise the required amount from the general public. So buyers who are
interested in buying the shares of ABC Ltd, which is new to the stock market, will purchase them
and then later may hold onto them or sell them after some period of time. Therefore, when a
company undergoes an IPO its ownership is distributed amongst thousands of shareholders. Once
the company is listed on any stock exchange, its shares are now traded in the markets.

Follow on Public Issue

A follow on public issue can be considered a means of raising additional funds by a company which
has already undergone an IPO (is listed on the exchange). Consequently, when a company decides
to issue a fresh set of shares other than those issued during its IPO process, it can be said to be a
follow on public issue method of raising capital (funds).

Again considering the company ABC Ltd, we will continue our example from the time period when
it became listed on the stock exchange. Supposing that the company underwent through an IPO in
2019 and thus became a publicly listed company. Nevertheless, 2 years after becoming a publicly
listed company, ABC Ltd is planning to build a new plant for manufacturing its products and
requires Rs 80 lacs for the same. The company again opts for meeting its funding needs by the
issuance of shares. So, it decides to issue a fresh set of 80,000 shares in the year 2021 priced at Rs
100 each. This fresh/additional issue made by an already listed company is called a follow on public
issue. The shares which are issued during a follow on public issue are issued in the primary market.
Later, the same shares are traded between holders of these shares and those who are interested in
buying these shares in the secondary market.

Rights Issue

This is a method of raising capital by issuing new shares to existing shareholders of the company.
Under this, an already listed company issues fresh shares to its existing shareholders on the basis
of the number of existing shares held by each shareholder. It is within their rights as a shareholder
to purchase the stocks offered to them. It can be said that holders with a larger number of shares
will have the opportunity of buying more shares under the rights issue, within a specified time
period and at a specified price. But, it is not obligatory upon the existing shareholders to purchase
the fresh shares issued to them.

Example: Taking the company ABC Ltd into account, it can be observed that after undergoing an
IPO and a follow on public offer, the company now has 5,80,000 outstanding shares. Suppose that
the company opts for a rights issue for raising additional funds amounting to 1,00,000. The
company then will price its fresh shares at a discounted rate of Rs 50 which will be lesser than the
ongoing market price of Rs 60 and allot them to its existing investors in accordance with the
proportion of shares already held by them. The investors have the right to opt out of the rights issue
or participate in the issue by purchasing the fresh shares at the discounted price. The company will
allocate 2000 shares to the interested shareholders at a specified price (Rs50) and on a specified
date, before which investors will have to subscribe to these shares. Once the subscription procedure
ends and the shares have been subscribed to, the company will now have 6,00,000 (2000*50)
outstanding shares circulating in the market.

Bonus Issue

A bonus issue is a form of issuance of shares, similar to a rights issue, in which fresh shares are
issued to existing shareholders but free of cost. Also, the free shares are issued to existing investors
in proportion to the number of existing shares held by them. For example, a company may give 1
bonus shares for every 10 shares held by an investor.
It is important to understand the distinction between a rights issue and a bonus issue. The
fundamental difference is that in a rights issue, investors have to pay for the fresh shares which are
issued to them and only have the benefit of purchasing the shares at a discounted price when
compared with the market price. However, in a bonus issue, investors do not have to pay anything
for holding the fresh shares issued to them and it can be considered as a kind of gift given by the
company to its investors.

It can be concluded that the primary market is used by companies for raising fresh capital from the
general public. To summarize –

1. When a company accesses public markets for the first time, it is known as an initial
public offering.
2. When an already listed company accesses public markets to raise capital, it is known as a
follow on public offer.
3. A rights issue is when a company raises capital but from existing shareholders only.

SECONDARY MARKET

The secondary market offers avenues for buying and selling of financial instruments like stocks
and bonds between individual investors. The basic difference between a primary market and a
secondary market is that in a primary market, shares are sold by the issuing company to investors,
whereas, in a secondary market, shares are bought and sold between individual investors, thus
depicting the demand and supply levels of stocks.
Also, as the company itself sells its shares in the primary market, the price bands are fixed
beforehand by the company and securities are issued for the first time by the company. On the other
hand, in the secondary market, trade takes place between thousands of investors every day. It
involves selling and buying of securities which have been already sold in the primary market

PRIMARY MARKET

Type of Transaction Direct Indirect

Parties Involved Issuing Company and Investors Investors

Price Fixed Price Bands Depends on the dema

For a better understanding, let us take the Finlatics Program into account. You are a virtual investor
who has participated in this program. Will you be able to guess whether the virtual platform on
which you are trading can be considered as a primary market or a secondary market?

Yes, you have guessed it right, the platform can be considered to be a part of the secondary market
where shares are bought and sold between investors. You can be considered to be an investor
trading on the Finlatics platform which is similar to what exists in a secondary market.

PRIMARY MARKET :
SECONDARY MARKET :

Now, if you are wondering how the prices of various stocks are determined in the secondary market,
remember that they depend on the demand and supply levels of the stock. It is common to observe
stock prices of thousands of companies changing every minute of the day, with prices one day
shooting up at the speed of a rocket and then another day hitting rock bottom.

Basically, a company’s stock price is determined by the market demand and supply for the
particular stock. These demand and supply levels are in turn affected by a number of factors.

 The fundamentals of the company influence its stock price to a large extent. The
fundamentals of the company are reflected in the annual and quarterly reports published
by the company.
The research blogs prepared and submitted by you on Finlatics are similar to performing a
fundamental analysis of a company. As fundamental analysis involves researching the
management of the company, its revenue growth, how well is it performing across
financial ratios (price-earnings ratio, earnings per share ratio) and whether its
performance is on par than the industry in which it operates. the research project assigned
to you is a perfect example of practical level fundamental analysis work.
 Market news regarding the company influences the demand and supply of the company’s
stock. If the company is in the news for positive reasons like posting a double-digit
growth, then this will lead to an increase in demand for the stock under consideration
which will cause its price to rise, as every investor would be interested in purchasing that
 stock. However, if the company is in the news for negative reasons like lower demand
scenario, this will lead to a decrease in the demand for the particular stock and every
investor would be interested in selling his shares of the company to avoid substantial loss
which will eventually increase the supply level of the stock in the market, thus driving
down its market price. However, there are interesting calls that one can take during
negative news as well. While looking at the news as a factor, it is important to
differentiate and subjectively analyze news, by gauging the impact it would have on the
company from a time-based standpoint.
 There are some factors which influence the share price indirectly. These are called
macroeconomic and industry-wide parameters. These include government announcements
that are beneficial for the industry under which the company comes. Even the government
announcing an increase in its public spending on infrastructure comes as a piece of great
news to a number of industries involved in the building of such infrastructure and thus
affects the share price of the companies under these industries in the anticipation that the
company will post more profit levels and growth if it gets involved in the government
projects.
Irrespective of whether the company is in the news for favorable reasons or for
unfavorable reasons, your positioning as an investor can be anything. When a company is
in the news for negative things and its share price has plunged, some investors might
consider this situation as a great opportunity for buying these shares and exit the market
after some period of time, once they are able to make substantial capital gains. So even if
a company’s stock has been observing a downward trend for a few months, there always
exists a possibility that it might overcome such a phase if the company has strong
fundamentals.